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Oil: Better Late than Never

I suggested last October 10 [see: Welcome to Peak Oil] that oil, then at 51.60, would need to fall significantly to avoid nasty YoY CPI comparisons in Feb 2017. Recall that CL reached 26.05 on Feb 11, 2016 — so Feb 10, 2017’s close at 53.85 was roughly a doubling over the course of that year.

As it turned out, CL did drop sharply — dropping 18% to 42.2 by Nov 14. But, TPTB were quickly reminded of what I had been posting about for months: CL had taken over primary responsibility for driving equity algos. Having driven SPX almost 20% higher since Feb 2016, CL’s decline was now dragging equities lower.It was SPX’s second such dip below the midline of a large rising channel (yellow arrow below, the first being Brexit) and the Central Planners wanted nothing to do with the bottom half of that channel. The day after the US election, CL joined with USDJPY and VIX in trying to convince investors that the election results were a good thing [see: Why the Trump Rally is a Fraud.]

Everyone knows the rest of the story. Oil ignored huge inventory builds and rallied through the end of the year to new highs — enabling SPX to do the same. Even after the channel that carried it sharply higher for two months broke down on Jan 9, CL managed to limit its losses to 8%. Even after January’s CPI numbers came out at 2.5% on Feb 15 — due largely to oil and gas — it still bounced back, almost to its previous highs.

That was then…and, this is now. We’ve been expecting a divergence between RBOB and CL, and the past few days has not disappointed. It seems TPTB have reached a compromise that will enable gasoline prices to drop back to an acceptable level without CL participating in as much downside.

RBOB rallied sharply along with CL and, well, everything else in November — suggesting a new, faster rising white channel and avoiding our original white target at 1.4855. Yesterday, RBOB closed below its SMA200. This morning, the white channel broke down. RBOB might just find its way back to the red channel after all.

Much of it, of course, has to do with what SPX has accomplished over the past couple of weeks.